Deflating a massive credit expansion are like bombs going off all around. Deleveraging all these institutions is like a crack in a dam that grows and breaks, and the water wipes out the countryside.
If there was an easy way to describe the situation I would say it is something like this. The market, with low rates and full of liquidity (cash), needed to find a way to make a profit with it. So they leveraged it to the maximum amount. The idea was to create a profit with the least amount of equity. This drifted right down the eco scale and fell right on the consumer. They needed people to borrow all this money, more and more people so they could move as much of it as possible.
This is where it all gets sticky. My understanding is the fudging ran ramped. The mortgage originators came up with every different way to justify the reason they could underwrite these loans. Most no one cared. When I was hearing, a few years back that you could borrow the 80% on a first and they would loan you, no problem, the other 20% on a second, I said (excuse me), "holy s---", here we go again.
With all this going on they came up a great solution; let's insure it with credit default swaps. So, AIG took about $480 billion worth of these and went out on a limb. I guess they thought it was easy business.
Letting Lehman go down was a bad move, this really got the fed going to stop crunch. Lehman failing was dragging down the money markets funds. They had paper on the street which affected the funds along with holders redeeming at a record pace. The first one, one of the originals funds, the $60 billion Reserve Primary Fund was redeeming for less than 100%. This was the first in 14 years.
Around the world, other Central Banks will do something similar to us eventually, they have problems also. As for the rest of the solution, there is a load of money sitting on the side lines which will bid for the assets also. They will feel comfort knowing that there is all this capital available from Uncle Sam as a backstop to the contraction in credit. The sovereign funds from many oil producers, flush with cash are waiting to buy our real estate.
Real estate will be a direct recipient to this program, along with car loans, small business loans etc. The banks need the capital to lend. They will get it. This will lower interest rates; we all know what that does. I believe rates will lower also because of demand. This is due to the slowing economy. This massive inflow of cash and feelings by the government that home owners need help; will make plenty of capital available to get real estate off and going.
Real Estate Agents shoud organize for this change. List all they can and be ready. I don't know if it will be next month or we will have to wait for spring. Get a marketing plan ready. Look at their web presents. Make sure they are ready for the change. Let your buyers know how you feel ablut this change.
I am going to write a blog about what and how it looked on the street in the 80' savings and loan bust. I had clients buy huge portfolios of commercial real estate when everyone was running away or didn't have the mortgage availability.
What do you think, I feel we have gotten frighten here and that is what bottoms are like.
Also, if you haven't read, When will the real estate market bottom?
It is a reverse look at the street view of this crisis back in 2005.
view my new home for sale and more
The Country is like deer caught in the headlights, let's get going!
All this wrangling for political positioning, while another major bank, Washington Mutual goes down. We don't have the luxury of time to debate. I think most everyone is getting numb to it all. People are confused and nervous. We must be wise, but the boat is sinking and some officials are wondering what is for lunch.
We need to see action and agreement. This will give confidence to all the markets. What bank is next?The banks won't even loan to each other, let alone someone else.